Tuesday, August 08, 2006

Regarding COHA’s August 8 Press Release “Expanding the Panama Canal: A Wider Canal or More Governmental Payola?”

  • Under the Torrijos government, the expanding Panama Canal will not likely serve the needs of the vast majority of Panamanians. Much of the benefits will be tied to the commercial interests of the country’s accountants, bankers and lawyers, as well as their U.S. counterparts, and world trade
  • Final costs: $5 or $25 billion?
  • The current government, not yet corruption-free, is not sufficiently professional to be trusted as the steward of such an enormous and lucrative financial venture
  • Evidence of venality surrounds the Torrijos administration, as well as the canal’s management
  • Other administration flaws raise questions about Panama City’s capacity to supervise such an enormous project
In early May of 2006, Panama’s President Martin Torrijos announced the publication of the official summary of the proposed canal expansion project and rallied the nation to support the single largest public works project in that country’s history, after the construction of the Panama Canal. The fate of this project will be determined in the referendum scheduled for October 22 of this year. The expansion, proposed by the Autoridad del Canal de Panamá (ACP), includes the construction of a third set of locks as well as the expansion of existing ones, allowing for a faster transit of ships as well as accommodating larger “post-Panamax” vessels.
According to the ACP, an increase in tolls and foreign loans will pay for the estimated $5.25 billion project. While the government boasts that the project will generate a vast number of jobs for its large numbers of unemployed citizens, many Panamanians are coming to the conclusion that canal expansion may not be in their best interest at this time.

Full article...

~Dear Larry Birns,

I. There are factual errors in the piece. For example, your document says that the project includes widening the existing locks — this is not part of the proposal and has never been considered. On the Moscoso item you mentioned, I can tell you definitively that she is not serving in any role on the expansion project, in the Panamanian government or at the ACP.
I understand from our conversation where you were trying to go with this piece — and what precipitated COHA writing it — but the piece really does leave the impression that the project is wrong, that the ACP/Panamanian government is corrupt and that expansion would be a disaster for the country.

Again, as I know you know, there is total unanimity that the ACP (which is autonomous from the government) is doing a good job for the Panamanians and world trade—they are running the Canal better than the United States. Moreover, the ACP’s billions in contributions to the Panamanian government in six years exceed by far the contribution the U.S. gave to Panama from 1914-1999. And expansion is needed now — the impetus for the project is that the Canal is nearing full capacity. I would encourage you to review, in particular, the unique aspects of the proposal, such as the use of rolling gates and the benefits of Water Saving Basins, which are good for the environment and water conservation.

II. As I mentioned, the ACP is prohibited from creating debt for the Panamanian government. The costs for the project are prohibited from being transferred to the government of Panama and, by extension, to Panamanians. The impression or “take away” from the piece is that the project is corrupt, going to cost a lot more than the estimate and that the average Panamanian is going be left holding the bag. Below are the laws of the country which ensure the abovementioned items:

A. Panamanian Constitution, Title XIV Article 320
Article 320. The Panama Canal Authority shall adopt a triennial financial planning and management system, according to which it shall approve its annual budget by means of a justified resolution; this budget shall not be included in the general budget of the government of Panama.

B. National (Legislative) Assembly LAW No.28 (of July 17, 2006)

Article 2. The proposal approved by this Law shall be subject to the following provisions:
1. All of the works costs and pertinent financial or other liabilities which proceed there from shall be paid with moneys generated from Canal operations and from such tolls increases as may be determined from time to time, pursuant to relevant norms and procedures.

2. The Canal as defined in Law 19 of 1997 and given its inalienable nature, shall Not be mortgaged, or encumbered in any other way whatsoever, in order to guarantee the fulfillment of the liabilities originated by the project; nor shall it be the object of any precautionary measure to demand fulfillment of such liabilities.

3. During the construction of the project, payments by the Panama Canal Authority to the National Treasury in concept of surpluses shall not be less than those made in such concept for Panama Canal Authority Fiscal Year 2005. The total amount of the transfers in concept of fees per net ton and surpluses shall not be less than the total amount of the transfers made for Panama Canal Authority Fiscal Year 2006.

4. No reservoirs shall be built for the operation of the third set of locks.

5. Funding for this project shall not bear State endorsement or guarantee.

C. Panama Canal Authority Expansion Proposal, p. 72 of PDF
No guarantee or endorsement by the Government will be used. None of the Canal’s financing will bear the sovereign guarantee of the State. Consequently, the Canal’s financing contracts will not be consolidated with the sovereign debt. In other words, just as Canal finances do not form part of the public sector’s finances, the financing for building the third set of locks would not form part of the State’s public debt.

III. On the cost estimates

It is irresponsible to say that the project may cost $25 billion. No one believes the cost is going to be $16-25 billion. The Roger Pardo-Mauer’s quote was not reacting to the ACP’s project; it was in relation to an abstract question on Canal modernization/expansion and was not supported in any way, with backup, facts or third-party evidence. He did not know the details of the Canal’s proposal when he gave that answer.

Aside from Pardo-Mauer’s one line, there is no evidence that the project would cost substantially more than the ACP’s estimates. The ACP has spent the better part of three years modeling this project — with substantial outside help from academics and management consulting firms. In total, they have done more than 150 studies.

Here is some background on the research done for the costs:
ACP personnel developed the costs and estimates based on numerous demand forecasts, under the guidance of premier firms, using sophisticated financial modeling to provide their surveys and estimates.

* There are three main pillars to the cost estimate:
o First, the cost estimate is based on a detailed lock and navigational channels conceptual designo Second, this conceptual design was thoroughly analyzed in terms of the feasibility of its construction, to determine the sequence and interdependency of activities, and to accurately estimate the requirement for manpower, equipment, operating supplies, energy, administration and tests and materials, among other considerationso Third, the cost estimate was supplemented with the use of a state-of-the-art risk analysis model that evaluated and weighed factors such as uncertainty and contingencies
* The project’s cost estimate considers:
o Potential increases in manpower
o Equipment
o Operating supplies and materials costs
o Possible price fluctuations (particularly for key operating supplies and materials)
o Delays in the construction (such as weather, design changes, productivity fluctuations)
o Consequences and effects of shortages or timely availability of equipment, materials, and personnel
o Effect of inflation during the time period. The total estimate includes an average annual inflation of 2 percent and does not include possible financing costs per information from the General Comptroller’s Office and the International Monetary Fund World Economic Outlook Database of March 2006. Panama’s average inflation has been approximately 1.10 percent during the last 16 years (1990-2005)
* Cost Breakdown (in millions) Totaling 5,250:
o Locks
+ 1,1100 for Atlantic Lock+ 1030 for Pacific Locks+ 590 for Contingency (possible variations for each component along with an assumed inflation of 2%)
o Water Saving Basins
+ 270 Atlantic+ 210 Pacific+ 140 Contingency
o Access Channels for New Locks
+ 70 Atlantic (dredging)+ 400 Pacific (dry excavation)+ 180 Pacific (dredging)+ 170 contingency
o Existing Navigational Channel Improvements
+ 30 deepening and widening of Atlantic Entrance+ 90 widening of Gatun Lake Channel+ 120 Deepening and Widening of Pacific Entrance+ 50 Contingency
o Water supply improvements
+ 30 increase the maximum level of Gatun Lake+ 150 Deepening of the navigational channels+ 80 contingency

IV. Your piece also claims that the jobs creation estimates are way off and that there are contradictions between the government’s estimates and the ACP’s. This is not true. Both the government of Panama and the ACP have maintained that there will be job creation of 35,000 to 40,000 direct and indirect (6,500 – 7,000 will be direct during the high peak of construction). On medium-and long-term growth, both the government and ACP have maintained that, assuming certain GDP predictions and economic forecasts, (study performed by IntraCorp, March 2006) an additional 150,000 to 250,000 people by the year 2025 would have a job thanks to expansion.

Appreciate you addressing this. Please let me know if you need additional information.

Thank you again.

Chris Hayes Consultant on Panal Canal Expansion

Edleman Public Relations~

~Dear Larry:
It’s been too long. Hope you are well and still battling away. We will never forget your support during our darkest years in Panamà.
I’ve just received COHA’s “Expanding the Panama Canal…” and believe you might be interested in my comments.

After much study and investigation I came out with a positive opinion on the Canal expansion project, but also with a very strong position on the need for a “social Pact” of all sectors of society on the required social investments of the excess revenues produced by the expanded Canal, and a citizens’ monitoring system to guarantee the funds are not unwisely spent by politicians of all stripes and partisan colors.

The excess revenues between the years of ’07 and ’25 are estimated to be $29 Billion dollars. This money, well invested, could pole vault Panama into the First World – which necessarily means eradication of poverty and creation of a strong middle class. I believe the movement towards a consensus of a social pact is close to being achieved with UNDP as facilitator; we will know in the next few weeks. The only hold-out is the President, but we are keeping the pressure on strong.

Some notes on your report:

a) “The project is likely to go way over budget..as much as 5 times the amount”.
Budget overruns on a 7-8 year project are obviously a major concern,but inflation is calculated way over historical averages, material price increasesare built-in and there is a one billion dollar contingency built in; afterexamining it closely, I am comfortable with this risk factor.

b) “Many Panamanians are coming to the conclusion the Canal’s expansion may not be in their best interest…”.
Serious surveys consistently show from 60 to 70% positive votes for expansion, with an extra 10 points if a social pact process is started before the Referendum.

c) “…the project will only serve as another vehicle for the US to project its authorityin Latin America…”.
Wow! This is the first time in our history as a nation that the Canal is run by Panamanians (much better, may I say, than the U.S. did). The expansion project is built by Panamanians and will be approved by Panamanians. For the first time we will not have the gringos to blame. As for U.S. influence in Latin America, inmy view, it has never been weaker. Anti-U.S. positions seem to elect governments throughout the hemisphere.

d) “Revenues from the Canal in 2005 Fiscal Year were $489 Million…”
Wrong! Revenues were $1,250 Million. Profits to the Panama government were $489 Million.

e) “The Catholic Church of Panama is adamantly opposed to the expansion”.

f) “Bobby Eisenmann, a prominent Panamanian….purportedly wrote for the ACPpropaganda Journal “El Foro”, which is included weekly in La Prensa, a publication that Eisenmann partly owns. In exchange, Eisenmann allegedly has received a lucrative benefit from the insertion of the campaign brochure in the newspaper”.
Wrong, and shameful for COHA! How can anyone in his right mind believe that a man who risked his life on a daily basis for 21 years fighting a Dictatorship on principle is going to sell-out his soul “in exchange” for pennies going to a newspaper from which he retired 11 years ago and in which he holds a minority ownership position of less than ½ of 1%? Besides, what I wrote was an op-ed piece in La Prensa, and that’s what was reproduced by El Faro.

The other corruption assumptions under the same sub-title are equally wrong.

a) “Lack of press freedom…”.
Based on the firing of one columnist? ….come on, be serious! Panama has a vibrant critical Press that drives governments of all stripes up the wall on a daily basis.

b) “The expansion is not of immediate vital importance as post-Panamax shipsare not in wide use”.
Wrong. The expansion is needed for all ships due to lines of ships waiting to go through. Once we decide on the needed expansion, it is best to accommodate the post-Panamax size ships now in production.

c) “Observers must be vigilant when it comes to ensuring a fair Referendum in orderto prevent the type crisis now witnessed in Mexico”
Post-dictatorship Panama has had 6 electoral and referendum voting processes, and in all 6 the Opposition of the moment has won, and not once has the loser cried “foul”. We have an almost perfect electoral democracy (no Mexico comparison is possible).
We lack a citizens’ Democracy and require radical judicial reform and a continued fight against corruption (I chair the Transparency International – Panama Chapter).

Larry: I sincerely hope that my comments will help you balance out COHA’s position, as I always knew it…: hard and firm in its quest for justice, but with serious information.

A big abrazo from your long lost amigo,
I.Roberto Eisenmann, Jr.~

~ Hey Larry,
No problem; I’ve just read it & I’ve had a few minutes to spare todayso I’m responding at some length.
My impression is: what is Panama’s alternative? The Canal is their mostlucrative asset and from an overall shipping perspective, I don’t seeanyway around the argument that it must be expanded as soon as possible. If the status quo remains, the only option to increase Panama’s revenues from that asset is to watch traffic hit the capacity ceiling at some point in the next five years, then squeeze customers as much as possible when that ceiling is reached by hiking tolls further, until customer backlash from costs and delays pushes them to alternate routes.
I agree that the percentage increase in Asian-US trade is going toinevitably decrease, particularly given that the limit of importsubstitution for certain goods that were previously US domestic-sourcedis being reached, so Asian-US trade growth in such cases will fall more in line with US demand growth for those goods and will be less inflated by offshoring.

But I think it’s incorrect to assume that Panama Canal traffic growthis so directly correlative with Asian-US trade growth. In fact, Canal growth is being heavily buoyed by the diversification strategies of the major US shippers (Wal-Mart, et. al.), who have been convinced by the 2002 US West Coast port labour disaster and the 2004 congestion crisis in LA/Long Beach that they can no longer afford to keep all their supply-chain eggs in the LA/Long Beach basket, therefore, they must diversify import gateways more to the US East/Gulf Coasts via both the Panama Canal and increasingly, the Suez Canal.

This trend (which is believed to be a largely permanent supply chainshift)is a major factor in Panama Canal traffic growth above and beyondoverall Asia-US trade growth — representing a plus for the expansion argument that your article doesn’t mention. Also in Panama’s favour, I’d point out some significant advantages over its Suez competitor vis-à-vis import diversification to the US East/Gulf Coasts: the Suez is much more expensive toll-wise (even vs. the projected Panama rate hikes to fund expansion) and the route from Asia-to-US is longer via the Suez, meaning that more ships are required to offer weekly Suez service strings than Panama service…currently, the Suez’ pitch to shipping lines is that they can use larger, more cost-effective vessels, but Panama would theoretically undercut this advantage through its expansion.

Anyway, I personally believe the Panama government is doing the right thing by pushing for Canal expansion now. They have devised a construction plant that will keep transits volumes flowing during construction process. And more importantly, the alternative inherent in not moving forward is: (1)shippers will be forced to keep more of their US imports flowing through the West Coast when they otherwise wouldn’t have and (2) alternate trade routes will grow and take the profits Panama could have gained for itself(alternatives include not only the Suez but plans for new British Colombia and Baja port developments using rail links to US, and to a much lesser extent, the very nascent cross-Mexico land-bridge idea). In other words, consider the opportunity costs of Panama not moving forward.

Of course, I have no doubt the whole venture will be riddled with corruption, but who else but the Panama government can expand the canal? So I think of it as a necessary evil allowing the necessary expansion of just about the only asset Panama has that can create more employment and prosperity for the country. Even if I agree that the trickle-down effect will be heavily diminished by the people at the top taking an overlarge share of the booty, what other alternative is there for Panamanians given their limited assets?
I also think that now is the time to move forward, not later, because the Canal is just years away from reaching its capacity and developers providing carriers and shippers with other trade-route alternatives will be quick to take advantage of any delays in expansion by Panama. Meanwhile, Panama has studied this thing to death already; I don’t think they’ll gain any further insight by doing more studies.
I’m not saying the whole thing won’t go wildly over-budget and be a disaster; it’s Panama, after all, so that’s certainly possible. But the shipping industry is indeed willing to pay the higher tolls to underwrite this, the volumes are there and are fairly certain to continue growing, and the alternative is essentially a guaranteed loss, versus a potential albeit uncertain win. Anyway, that’s my opinion.

–Best regards, Greg Miller~

~ COHA Responds:

Several weeks ago, Ashley Dalman, along with a number of other COHA research associates who had collaborated with her on the research project, issued a study on the recent proposal by the Panamanian government to increase the capacity of the Panama Canal. COHA’s major thesis was not to suggest that the canal does not require expansion, but rather that the project’s estimated cost (over $5 billion) may, in practice, dramatically exceed that figure and could cost as much as $25 billion accounting for over-runs, inflation and the inevitable factor of corruption. Given the nature long history of graft and venality on the part of past Panamanian governments, as well as the already swarmy track record of the Torrijos administration, COHA argued that the latter may not be the best-suited candidate to be the steward of such an ambitious endeavor. Two other concerns which COHA has taken up in its essay are:

1) the validity of the government’s claim of the number of jobs that will be created from the expansion project

2) the lack of public discussion concerning the possible environmental impact.

Additionally, in reference to Chris Hayes’ letter re-printed here, COHA recognizes the impartiality, up to this point, of the Canal Commission, the ACP; however, with Panamanian history so full of insidious corruption incidents—often involving U.S. principals—and the ubiquitous nature of Panama’s lack of civic rectitude, one would be wise to be somewhat wary of any adverse pressure on the autonomous nature of the ACP and whether the Torrijos administration is a fit implementing body for the project.

COHA acknowledges the factual errors that Mr. Hayes has graciously pointed out. Like all research projects, this one is not immune from an occasional mishap and COHA will immediately modify its findings to reflect these facts.

COHA Director, Larry Birns will be addressing the statements made by Roberto Eisenmann concerning the canal expansion as a way to transform Panama into a Singaporean-like society. We have also sampled the large response of emails that we have received on the subject and reprinted some of them above.

Forum Editor~

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